This article has been written by Aditi Kumari, pursuing the Certificate Course in Insolvency and Bankruptcy Code from LawSikho.

Introduction

The most recent development in the wave of regularising the insolvency and bankruptcy regime of India is the enabling of bankruptcy proceedings for personal guarantors. However, part III of the Code, which specifically deals with the individual insolvency, remains in its pre-nascent stage. If reports (see here) are to be believed, the said part is soon to be notified by the regulator causing major transitions in the financial market. 

Currently, the individual bankruptcy matters are governed by two similar British era legislations: the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act 1920. With the market growing every day, these dormant legislations are proving to be incoherent with the demands of debtors such as the entrepreneurs as well as the creditors (formal and informal).  Amid the ever going phase of amendments to the corporate insolvency regime of the code, the notification of individual insolvency regime is something to look forward to.   

History

The history of legal adjudication for recovery of bad debts date back to the 1880’s, starting from the Negotiable Instrument Act, 1881. This regulation has been used widely to recover the debt through criminal proceedings under Section 138 of the act, though the section has recently been decriminalized.  Apart from this recovery based legislation two insolvency regulations were enacted:

1) Presidency Towns Insolvency Act (PTIA), 1909:  This act was specific for the presidency towns of Calcutta, Bombay and Madras. This act has been modelled after the UK law or individual Insolvency. Since then the UK regulations have gone through a paradigm shift which clearly was not adopted by the Indian legislation. The need for new legislation can be justified only by the shortcomings of the erstwhile legislation. In this case, the legislation failed to set up a time-barred proceeding, as the timeline of the proceedings depended completely on the judge (see here).  There were irregularities as to the role of the intermediaries and the regulators as well as the priority of debts. It should also be noted that the legislation has been used to a very limited extent and creditors mostly referred to the recovery mechanisms. 

2)  Provincial Insolvency Act (PIA), 1920: This legislation was enacted specifically for the provincial towns during the British era. Since the features of this act are completely similar to that of the PTIA Act, except for the jurisdiction, the same kind of shortcoming is ascertained to this act. 

Apart from the above-mentioned legislations, the formal creditors often took recourse of the  Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act (SARFAESI), 2002 for the recovery of bad debts, which was however limited to the cases of securitised assets. 

The previous mechanisms are hence incoherent, exclusive and outdated with a paucity of cases which demands quicker process, effective intermediaries, and avoidance of deterrent regulations as well as a limited recourse of the courts. 

A fresh start

The new Insolvency regime which has previously taken over the matters of insolvency of the corporations is set to notify the regulations for the individual debtors as well. The debtors have been categorized into:

1. personal guarantors to corporate debtors
2. proprietary & partnership firms
3. rest of the individuals

While the part of the code which deals with the personal guarantor has recently been notified, the other two parts are said to be in the pre-nascent stage. 

Procedure

The involvement of personal guarantors was posing to be an irregularity in the corporate insolvency resolution process as could be observed from State Bank Of India vs. Ramakrishnan & Anr. Civil Appeal No.3595 Of 2018 (see here). The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 has been notified by the Ministry of Corporate Affairs, after the proper implementation of which, the personal guarantors to corporate debtors are to be dealt with a separate mechanism which is congruent with the mechanism for corporate entities. The salient features of the regulations are:

1. The jurisdiction for the case of the personal guarantor to the corporate debtor has been vested into National Company Law Tribunal, while that of individual and firms are vested into the Debt Recovery Tribunal instead of the National Company Law Tribunal. 
2. The application can be initiated by the debtor as well as the creditor, similar to the case of the corporate debtor. 
3. In this case, the interim moratorium is immediate, and thereafter Repayment Plan is prepared by the Guarantor which has to be approved by the committee of creditors. 
4. In case the Guarantor executes the Repayment Plan successfully, he is discharged from his liabilities. However, if he fails to fulfil his liabilities, a bankruptcy proceeding is initiated. 

Part III envisages three processes for the purpose of individual debt resolution:

• Fresh start process (Section 80)

This concept is lauded especially in speculation of the post-pandemic period for its humanitarian approach, wherein an individual can seek moratorium limited with: INR 60000 annual income or INR 20000 assets. The application is to be filed by the debtor only.  Under this process, the debtor is discharged of his liabilities subject to the objections of the creditors. This option is available to the debtors for once only. 

• Insolvency resolution process (Section 94)

This process is similar to the corporate insolvency resolution process, where the repayment plan is approved by the creditors and upon the implementation of the repayment liabilities; the debtor is discharged from the debt. 

• Bankruptcy Process (Section 121)

Where both the abovementioned processes fail to resolve the debt, the application for the Bankruptcy process can be made by the debtor or the creditor.

The bankruptcy process

Upon the failure of the repayment process, the bankruptcy petition has to be either made by the creditor or the debtor. After the application is admitted, an interim moratorium starts over the guarantor. During this period an Interim Bankruptcy Trustee is appointed by either the creditor of the debtor. The order of bankruptcy is to be passed within 14 days of the commencement of the interim-moratorium. After the order is passed, the debtor is declared to be bankrupt. The interim-moratorium cease and the affairs of the debtor (except for some) are vested to the Interim Bankruptcy Trustee. At this stage, just like in the matter of CIRP, the committee of creditors is formed, which further appoints a Bankruptcy Trustee. The Bankruptcy Trustee further completes the administration of the affairs after receiving the claims of the creditors. The administration is made in accordance to the priority of claims provided in Section 178 of the Code. After the process of administration is complete, the application of discharge of the debtor is made by the Bankruptcy Trustee to the adjudicating authority. On approval of this application finally, the debtor is discharged from his liabilities. 

Declaring bankruptcy

As a country, we have seen that bankruptcy order is being legally procured by the government by the foreign governments in cases like the bankruptcy of Vijay Mallya and Nirav Modi. It is worthwhile to think that, how could have they declared bankruptcy themselves. In the current laws, a person can declare bankruptcy for an amount as low as INR 500. 

Under PITA and PIA, upon application by the debtor, the proceedings are initiated and affairs of the debtor are vested with an assignee. It is upon the court to decide the reasonability of the application, after which it passes an “order of adjudication”. After the process of the adjudication and sale of proceeds of the debtor is completed, he becomes absolute discharge from most of his liabilities. However as discussed above, in the case of the new Code now the intermediary is appointed by the creditors instead of the court giving more autonomy to the creditors. Under the Code, the process will be time-barred which is not so currently in the matter of the PITA and PIA acts causing relief to the credit market.  Hence as provided declaring bankruptcy under the new regime is going to be a more reliable process for the creditors and debtors as compared to the current laws and favourable to the distressed credit market. 

Can you go to prison?

Under the PITA and PIA acts, the judge has the discretion to order a warrant for the arrest of the debtor during the interim proceeding of the court. Also, in case of default by the debtor to produce his books of accounts or an act concealment of his affairs, he can be punished with n imprisonment which can extend up to 1 year.

In the new legislation, the punishment extending up to the period of 2 years has been provided for acts and omission like false representation, failure to provide a book of records, failure to deliver possession of the property as ordered, failure to explain the loss incurred to his property during the bankruptcy proceedings and absconding after the bankruptcy commencement. 

Conclusion

The upcoming developments in the personal insolvency paradigm are ought to make the regulations more creditor friendly, time-bound and structured. Akin to the corporate insolvency regime, now the personal insolvency matter would have the coherence of not being dealt with by multiple forums.  It is a matter of time only that age-old methods of recovery through retributive practices are done away with. However, along with other speculations, all the stakeholders have to be prepared for implementation issues which would require many amendments, regulations and judicial interpretations to start with. The Indian insolvency is any way in its incipient stage and it is going to take many years and amendments to come to stability.